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The art of giving

6 February 2012

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In these times of austerity and belt-tightening, it is reassuring to know that individuals are still, perhaps increasingly following the record set in the recent Children In Need campaign, conscious of their responsibility towards their fellow man. Whether this is down to the 'Big Society' or the age-old generosity of human spirit does not matter.

Whilst tax planning is not the main driver, most donors are keen that a gift is as beneficial as possible for both the charity and themselves.

All lifetime gifts are exempt from inheritance tax (IHT) so the impact is immediate for IHT purposes.  Similarly, assets left to charities on death do not suffer IHT, and for deaths after 5 April 2012 the rate of IHT on the remaining estate could be reduced from 40% to 36%.  But what of income tax and capital gains tax (CGT)?

Gifts of cash

If a gift is made under the gift aid scheme, the charity is able to recover 20p from the Government for each 80p gifted and the donor is regarded as having made a gift of £1.  This then reduces the amount of income chargeable to the higher rates, thereby delivering higher rate tax relief.  By way of example, for a 40% taxpayer the charity recovers 20p for each 80p gifted, while the donor’s personal income tax liability is also reduced by 20p, a total saving of 40p on a deemed gross gift of £1.  For a 50% taxpayer the figures are 20p and 30p respectively.

A further tax planning opportunity arises because a qualifying gift aid donation can be carried back to the last completed tax year so long as both the gift and the claim are made before the 31 January following.

The claim must be made on the return for the tax year for which relief is claimed.

This way the tax relief is advanced by twelve months and it might be possible to increase the rate of tax relief.  For example where an individual’s gross income is in excess of £100,000, the personal income tax allowance is reduced by £1 for every £2 of excess income.  This particular rule results in income being taxed at 60% in that band of income in which the personal allowance is reduced.

By carrying back gift aid payments to a year to which this applies, it might be possible to reduce income to below £100,000 for this purpose and thus reinstate the personal tax allowance.  The rate of relief can then be up to 60%.

In the same way, carrying back gift aid payments can result in a higher rate of relief, say because the donor’s income is lower in the year of donation.

One final important point is that it is not possible to carry back part of a donation.  If a donor wishes to carry back only part of their proposed charitable donation in the year, it is necessary to split the donation between two separate gifts, one of which can then be carried back.

Gifts of qualifying asset

Gifts of assets to charities are generally exempt from capital gains tax but the following assets can be donated to charity with full income tax relief:

  • Shares and securities listed on the UK or another recognised stock exchange
  • Units in an authorised unit trust
  • Shares in a UK open-ended investment company
  • Holdings in certain foreign collective investment schemes
  • Land and property in the UK.

In each case the value of the gift for tax purposes is the market value of the asset at the date of gift.  This relief must not, however, be confused with the gift aid relief for cash donations.

Unlike cash gifts, the full value is deducted from the donor’s income on a £1 for £1 basis so no reclaim is available to the charity, i.e. the full tax benefit of the gift is enjoyed by the donor.

The other difference is that there is no facility to carry back donations of assets to the preceding tax year.

One further point to note is that if the donor sells the asset at a gain and gifts the cash to the charity, CGT might be in point on the realised gain, whereas a gift of an asset showing a capital gain does not give rise to a CGT charge, even though it takes place at market value.  The charity also does not pay any CGT when it sells the asset to generate the cash.

Generally this will mean that it is generally beneficial to gift the asset, however this might not always be appropriate.  If the asset in question is not showing a capital gain, then it might be better to sell the asset and then gift the cash, for instance where it might be beneficial to be able to make a carry back claim, or where a capital loss could be used to offset gains.  Whilst relief on cash is  shared with the charity, the overall value received by the charity is increased.

Conclusion

The generous tax reliefs for charitable giving provide opportunities but there are traps for the unwary. Care must always be exercised to ensure that maximum value is realised on each gift.

Stephen Barratt is a director in the Private Client team at accountants James Cowper Kreston.  He can be reached by email: sbarratt@jamescowper.co.uk.